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Sirius/XM Merger: What Happens if It Doesn’t Happen?

by: Stan Muse May 20, 2008 | about stocks: SIRI    

Stan Muse

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The Sirius (SIRI) /XM Satellite Radio (XMSR) merger has been under DOJ and now under FCC review for longer than the Iran hostage crisis. Jim Cramer has commented that the deal may not happen. How should the stockholders expect the two stocks to react, in terms of stock price, if the deal falls through because the FCC requires onerous conditions for the merger which cannot be accepted?

As a Sirius (SIRI) stockholder, I voted for the merger. It seemed to be a no-brainer. Both companies would fare better if they could cut costs and increase subscribers via the merger, and the combined company stock price should rise significantly. But now I am not so sure that I would vote in favor of merging at this point. The reason is that during the wait for DOJ/FCC approval for X/S Radio, Sirius has been quietly gaining ground in terms of subscribers and revenue on XM. Sirius now has 8.6 million subscribers with subscription revenues of $270 million to XM’s 9.3 million subscribers with subscription revenues of $275 million.

From the Sirius Newsdesk 5/12/2008:

SIRIUS (SIRI) ended first quarter 2008 with 8,644,319 subscribers, up 31% from 6,581,045 subscribers at the end of first quarter 2007. Retail subscribers increased 10% in the first quarter 2008 to 4,643,215 from 4,234,804 at the end of first quarter 2007. OEM subscribers increased 72% in the first quarter 2008 to 3,986,818 from 2,323,683 at the end of first quarter 2007. During the first quarter 2008, SIRIUS (SIRI) added 322,534 net subscribers and achieved a 52% share of satellite radio net subscriber additions.

Total revenue for the first quarter 2008 increased to $270.4 million, up 33% from first quarter 2007 total revenue of $204.0 million. …SIRIUS (SIRI) reported a first quarter 2008 net loss of ($104.1) million, or ($0.07) per share, an improvement of 28% over first quarter 2007 net loss of ($144.7) million, or ($0.10) per share. The adjusted loss from operations for first quarter 2008 improved 53% to ($39.5) million, as compared to the adjusted loss from operations of ($84.0) million in first quarter 2007.

This all sounds very positive for Sirius and the financial break-even point seems to be in site. If subscribers continue to grow at a reasonable rate, and if Sirius raises its subscription rate by $1.00 per month, the company should be profitable within a year.

The problem, of course, is cash to cover operating expenses. Sirius only has about $250 million in cash, but XM has only $211 million in cash. Sirius had a Q1 net loss of $104 million, but XM had a Q1 net loss of $129 million. Sirius appears to have more survivability and momentum, than does XM as they both strive for profitability. I see Sirius as having much less risk than XM, although they both have a great deal of it.

So why would Sirius pay a premium of 4.6 Sirius shares for each XM share in the merger? Because they set the terms over a year ago and have already agreed to them. However, if the terms were set today they might be more in favor of Sirius.

First let’s look at the amount of debt. Sirius has an accumulated deficit of roughly $4.5 billion and XM has an accumulated deficit of $4.3 billion – not that much difference. One could argue that XM has an advantage over Sirius in terms of programming and auto maker partners, but one could also argue the other way. See here for a good side by side comparison of offerings. The 4.6 share premium seems to be based primarily on the number of shares outstanding. Siriushas 1.56B shares outstanding with a market cap of $4.32B while XM has only 320M shares outstanding with a market cap of $3.84B, a ratio of 1 to 4.875 shares and 1 to 0.89 market cap. But today I would expect that share premium, weighing the survival risk of both companies to be about 3.5 to 1.

So how will the stock react in terms of price if the merger falls through? Here is my best guess. At first, both shares will fall as the market reacts to the negative news and huge let down. Sirius would fall to around $2.30 while XM falls to about $8.00. But shortly thereafter, the two should seek equilibrium around $5.00 as Sirius rises to about $4.00 and XM stabilizes at $6.00. The long term prediction depends on how they both grow in terms of subscribers and revenue. If they both survive then they should both do well over the very long run and stock prices should keep pace with each other as they gradually rise.

I still hope the merger happens soon because I still believe that the whole would be greater than the sum of the parts, especially in the short term. But, it must happen quickly because of the lack of operating cash. At this point, Mel Karmazin, Sirius CEO, should reject any FCC demands that he has not already agreed to in order to support the Sirius stockholders and subscribers. He should also hold out the option to cancel and replace any station which has less than 10% subscriber rate for a la carte subscriptions, including minority targeted programming, in order to ensure quality programming that people will pay for. If the merger falls through, then so be it and shame on the FCC.

No merger would likely be at the expense of XM, which might struggle harder to survive. Eventually, Sirius might be the only satellite radio company left anyway, with the freedom to provide what their fans want. Competitors will not be anxious to try to enter the niche due to start-up costs and the risk of late entry.

Disclosure: Stan Muse is LONG on Sirius

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This article has 164 comments:

  •  
    May 20 05:49 AM
    Stan, I dont agree with what you say, about Sirius being the only one left. As for start up cost, hell some entity could vary easy pick XMSR up for a song while it is in bankrupcy. As to the late entry, there would be none if they bought XMSR. I just cant see how you could think, some other entity would let the (most likely) 11 million and growing subcribers at the time of bankrupcy just wither on the vine. Not to mention all the deals that XMSR has with all its OEM partners, and would most likely be able to at least change the deal they had with GM to make that more reasonable (with a something is better then nothing deal). Hell I could see someone picking it up for 2 billion or less and not have shareholder/dept baggage. I am sorry I just dont see that ever happening. I think you are way out of the ball park on that part of your article. But on a happier note I like the rest of your article.
    Reply
  •  
    May 20 05:59 AM
    Greetings.

    Thank You for the information.

    Are many overlooking:
    * Direct TV?
    ** Another company acquring either company?
    *** Sirius and XMSR continuing to remain in business?
    eom
    Reply
  •  
    May 20 06:27 AM
    ForBetter, you are right. There is no way in hell this company would not get picked up out of bankrupcy. When I said 2 billion That gave the dept holders almost 50% of their value back. That would be a dream for banks holding the dept. in a company in bankrupcy. Not to mention the cuurent satellites in orbit are worth almost 2 billion to who ever picks up this deal, depending on how much of them was lease back.

    I personally dont see it happening though, I cant see the banks saying; We see you are only 3 to 6 months from being profitable but we just cant give you another 150 million on top of the 4 billion we have already. We would reather you go bankrupt and not get vary much back.
    Reply
  •  
    May 20 06:49 AM
    The posted articles by Stan Muse and the 2 posted articles regarding Stan's I find very acceptable and encouraging. Satilite radio is here to stay. It is a media not only for entertainment but a way of spreading the Good News throughout the world. The posted article by For Better is a good one. I am not a holder of XM stock but am optomistic that both companies will survive despite the final decision of the FCC. This article is posted from one who has a small investment in Sirius; 1,000 shares of Sirius stock which I have held
    for some three or four years and will continue to hold in any event.
    Reply
  •  
    May 20 07:10 AM
    "Sirius now has 8.6 million subscribers with subscription revenues of $270 million to XM’s 9.3 million subscribers with subscription revenues of $275 million."


    Is there a reason you're comparing Sirius' total revenue of $270 million in the quarter, to XM's subscription revenue of $275 million?

    Sirius had subscription revenue of $255 million and XM's was $275 million. Sirius had total revenue of $270 million, XM's was $308 million.

    Accuracy seems to be so optional these days.

    Look it up.
    Reply
  •  
    May 20 07:28 AM
    I think you need to look at the ARB players. Xm is 80+% institutionally owned...for a reason. These guys have sold siri short to acquire their xmsr shares. They have contributed to siri's amzingly high short interest, which now sits at 200 million shares or so..

    No merger means any sell off and forces siri short positions to be covered to close out the ARB play...as xmsr falls, those funds will be used to cover siri...
    Reply
  •  
    May 20 07:53 AM
    "Sirius only has about $250 million in cash, but XM has only $211 million in cash. Sirius had a Q1 net loss of $104 million, but XM had a Q1 net loss of $129 million. Sirius appears to have more survivability and momentum, than does XM as they both strive for profitability."


    You seem to make these comparisons, as if the cash and earnings are interchangeable. First of all, Sirius does have $252 million cash on hand, but they also have $100 million in credit facilities from Loral, giving them liquidity of $352 million, given their high rate of capital expenditures that they are incurring currently. XM does have $211 million cash on hand, but they also have $213 million in credit facilities available, giving them liquidity of $424 million.

    You focus on the cash available, but then dont comment on the cash flow, why's that? Did you note that Sirius had Free Cash Flow of ($186 million) in the first quarter, compared to XM's ($124 million)? Yet you think that Sirius is better off? Those two figures included the $30 million that Sirius paid Sound Exchange from the Arbitration settlement and the $40 million that XM paid to even up. XM's also included the $60 million MLB prepayment for 2008, yet Sirius is better off?

    You then compare the two companies Net Income, yet you dont note that XM's net loss was inflated because of the right off of their older two satellites. Or that with XM being acquired by Sirius, merger expenses are expensed by XM and capitalized by Sirius. Both moves inflated XM's net loss. For a fair comparison, why dont you look at the adjusted operating loss? Is it because Sirius lost ($39 million) and XM lost ($30 million)? Yet Sirius is better positioned?

    They let anyone write these blogs, dont they?

    Look it up.
    Reply
  •  
    May 20 07:56 AM
    crfceo.....that play will take a day....it will be asses and elbows to cover and get out of XM......then SIRI falls on all the disappointment. That gives you about 4 hours of trading to get out of SIRI if your not in the Arbitrage Play. Then if your a believer in life after the failed merger with SIRI, which I am, wait for the dust to settle and get back in. If either company goes into bankruptcy I agree it would be a fire sale for new entry.

    As far as Stan's article I find it interesting reading and possible if all this were happening in a vacuum, but it's not. I agree with 163888's comments above, the Banks are in these companies deep, and finding financing will be a logical next step, although rates will not be as attractive.
    Reply
  •  
    May 20 08:30 AM
    birdman264 - You are correct Sirius subcrription revenue was $255,640, not $270K. Sorry, I stand corrected. My mistake, Good Catch!

    Stan Muse
    Reply
  •  
    May 20 08:48 AM
    To FCC;
    You all should be embarrassed, and fired! You have lied and stalled enough. 180 day clock =a scam, by the end of the year=a Lie, by the end of the first quarter=another Lie, Shortly after the DOJ decision=another lie, Martin says he was having multiple drafts written months ago=lie. DOJ has proven this is not a monopoly! Allow the licenses to be combined and stop pandering to every group out there! They have no right trying to get my Company for free, I paid for shares of my company and you have no right to give anybody anything that I own. If the minorities want more radio exposure let them go buy a radio station with their own money. This is a free country, not a socialist state. So allow the combo with no concessions other than what the companies agreed to begin with. I hope you are all investigated for this disgrace, you are going far beyond what the FCC was intended for and now you are using this unassigned power to destroy American confidence in our government, and any company you choose to destroy. Your stalling of this decision has cost me personally and many more I am sure, I hope the companies file suit for your stall tactics, the empire state building was built in less time. And both companies have now lost the Millions/ Billions due to your indecision. You have no right to cost companies so much. This is America, free market capitalism, remember? This is not a necessity it is a pay luxury service. Mr. Martin do you have a Boss that oversees you, or are you a free-bird with no one to answer to? I would like to speak to your boss because no common sense decision can take over a year to make. I don’t know of any company, employee, or anybody that can take so long to do a job and still have a job after showing this amount of incompetence. I want you and you group all fired. Here is a link to a video that shows how irrelevant you group is; www.youtube.com/watch?...
    So in ending you appear to be protecting your buddies at the NAB, and pandering to any special interest group wanting something for free. How about the Americans you supposed to be protecting? By the length of time you have been taking means one thing to this American and that is you are saying FU to ME. And I want you Fired. I will be sending this to anyone that will read it, the sad thing about that is that unless it is accompanied with a check, I assume no government official will read it.

    Signed; One disappointed American.
    Reply
  •  
    May 20 08:53 AM
    birdman264, I dont put to much in XMSRs numbers anymore, they tell you only what they want you to hear. They say the retail market is not that important anymore that is because SIRI now beats them by 186,000 subcribers in it. They want to try and include the parking lot subcribers in a fictional way and include it in evey way it makes their numbers look good (here is a clue try figuring them in on ARPU, they wont because they dont get paid for them and that means it will destroy it). Then forget to mention that they cant count them because they do not get paid for them. Someone should tell them that just because there is a satellite radio in their OEMs does not mean it is a subcriber, you need to get paid for the subcribtion. There is a reason SIRI doesn't count its cars with Kia for example, because they dont get paid until the car is sold and a person is subcribing.
    Reply
  •  
    May 20 09:00 AM
    P.S. I am sick and tired of disappointed American, cut and pasting his manifesto everywhere.
    Reply
  •  
    May 20 09:09 AM
    Thank you for the heartening news about Sirius, especially since I, also, own Sirius stock.
    Reply
  •  
    May 20 09:20 AM
    FilthyLucre, and disappointed American, should read the Reuters article "US Antitrust lawers say Obama mat be optimistic". It shows just which political party ideology is against mergers in general. Here is a clue, it is not the republicans.
    Reply
  •  
    May 20 09:24 AM
    re:888, I wish he would paste it on tree lawn signs and bar napkins. Anyone reaching one more person about our fearless self serving politicians is ok in my book. Just my opinion.
    Reply
  •  
    May 20 09:54 AM
    Hey 888, Free Speech Is what will go away with the FCC the way it is. I will paste this where ever I want in the hopes that the FCC gets the point. And that is; that we are watching, and won't stand by while are rights are taken away.
    Reply
  •  
    May 20 09:56 AM
    Regarding the possibility of of some entity picking up XM from bankruptsy, I guess that is possible, but I do not think so. In a booming economy, maybe, but not today when banks are strapped for cash, writing off billions, and having to turn down good loans. Also, this business is not like a retail chain or some other business that could get new customers as they emerge from bankruptsy. New SR customers must buy equipment up front and they will make their buying decision based on who they think will be there long term. Further, SIRI would pounce on existing XM customers trade-in deals and XM would implode. The, XM partners would quickly move to SIRI and the game would be over for new competitors.

    Stan Muse
    Reply
  •  
    May 20 10:00 AM
    My point is he blames Martin for this, yet Martin was the one saying that it would be decided by the end of the year. Martin cant help it if the democrats keep tring to slow this up, he cant help it if the two democrats keep wanting conditions that would not be acceptable to SIRI/XMSR. he cant help it, if the democrats want to pretend that they are the DOJ instead of the FCC. If he wants to put up a bitch note, then he should make sure the right people are the ones being blamed.
    Reply
  •  
    May 20 10:05 AM
    dissappointed American, Try doing some reasearch first and blame the right people. Try reading the Reuters article I suggested you read first.
    Reply
  •  
    May 20 10:07 AM
    Deal's not happening, can't take anymore unfounded optimism...too much emotion in this stock...
    Reply
  •  
    May 20 10:16 AM
    163888...your OEM analogy is a little off-base. XM is merely highlighting the fact that you can't compare the bases btwn the two companies without understanding a very fundamental difference in how each recognizes new subscribers.

    in the end, this is all accounting gimmicks to preserve ARPU legitimacy at SIRI...they get just enough up-front revenue to be able to count the widget. leveraging bookkeeping techniques to recognize deferred revenue helps keep the ARPU numbers looking solid.

    i think nate davis's point is more that XM could restructure its deals...and in doing so would allow it to recognize subscriptions much sooner than it does today...and if it did, it would have significantly more subs as a result. that, though, wouldn't get beyond the fact that the word "subscriber" has a certain connotation to it (that it's a person, paying to listen to content) and the nuance that SIRI chooses to use (we got paid for it, but the radio's sitting in a parking lot somewhere with no one listening to it) may not be fully understood at first glance.
    Reply
  •  
    May 20 10:19 AM
    Stan, come on, there are planty of companies out there with enough cash on hand that could pay to get a bankrupt XMSR. You act like service will be interupted while they go through bankrupcy Like XMSR will come to a total hult. Did Northwest or any airline for that matter just shut its doors and ground the plans? Answer = NO, Vary few companies do. Your opinion may be true for retail as far as people going more towards SIRI, but the OEMs would not stop.
    Reply
  •  
    May 20 10:20 AM
    Hey everyone, next time your boss asks if your done with your work, just say, "soon", and then NEVER actually do it... see how long you can say "almost done", before you get fired.

    Bush should be ashamed. Kevin should have been fired 90 days ago, at least.

    I wish there were more posters like Dissapointed American. The lack of a decission is 100% BS, and Kevin and his posse should be fired.
    Reply
  •  
    May 20 10:29 AM
    888,It IS Martins fault. He answers to no one. What he is doing (or NOT doing) is based solely on what will help him later in life. It has nothing to do with what is right. How could it? There is nothing so difficult to take this long for an ok. Or if he can fabricate like a sweatshop in Thailand, a not ok. Either way, he is NOT doing his job. He is stalling for personal gain or favors. Period. I can not remember the govt. EVER being this corrupt without any fear of recourse, from Bush down to my local city councilmen. And it sickens me to be an American anymore.
    Reply
  •  
    May 20 10:35 AM
    yoyoYO, Do you understand that SIRI ARPU is screwed because of the deferred revenew factor. Do you reallize that the way SIRI deals are structured are much better then the way XMSR deal are. Tell that to GM about being able to restructure its deal. I think they would say fat chance, they are sitting pretty with what they got, and are not going to give it up anytime soon. The only way they may is if a merger would happen, then maybe. yoyoYO you make it sound like it is a light switch that XMSR can just switch anytime, that is far from the case.

    I will agree, about both being creative with the accounting though.
    Reply
  •  
    May 20 10:39 AM
    I agree. The FCC delay is actually helping Sirius at this point. The merger is still the preferable, though, especially if they can get Xm at a better price. Funny, but the FCC delay may just make that possible.
    Reply
  •  
    May 20 10:40 AM
    "I dont put to much in XMSRs numbers anymore, they tell you only what they want you to hear."


    Are you implying that XM is lying on their cash flow and earnings statements? Or about their liquidity? Debating over non-GAAP metrics is one thing, but implying that they are lying on their financials is felonious.

    You can argue over XM's claim in not counting parking lot subs, even though I cant help but notice that you dont mention that the majority of those parking lot subs XM DOES receive revenue from. You ignore that fact. You see, for every claim you make about XM, you leave out the other side of the debate. Which was my point in commenting on this blog entry.

    But none of this matters, all I was pointed out is that both XM and Sirius are equally in difficult positions. To say that one is better off than the other without the merger is disingenous. Both are in serious trouble, Sirius is equally in as tough a position as XM.

    So your take is that XM is commiting a crime by falsifying their financials filed with the SEC?

    The depths that some will go to make one company look better than the other is astounding. It is this kind of thinking that clouds ones judgement.
    Reply
  •  
    May 20 10:56 AM
    thanksgovt, you sound conspiratorial. First of all nobody (I only include the commissioners) at the FCC are taking bribes, you have to get real there.

    thanksgovt, and sompsonic, You both sound like dumb ass democrats that cant come to grip with what your own parties ideology is. Do ether of you read, why dont you read the Reuters article I told you about and then come back and try and claim that dumb shit. Where are you two going to be when Martin is hauled in front of a democrat congress, because the 2 democrats on the board went crying to congress and told them; we were not heard, we had plenty of other things that needed to be gone over, this merger should have never been approved. Are you going to write congress and tell them what they are doing to Martin is bullshit, some how I dought it.
    Reply
  •  
    May 20 11:04 AM
    888 first of all I am neither dem or rep. I (try) and vote for the least possible evil. Although that is getting harder and harder anymore. Secondly, excuse me if I am a conspiraty believer. Excuse me if I believe Martin is personally gaining in SOME way. Do yo REALLY believe that this merger has taken this long simply because of these two self serving dem. assholes? GET REAL! And the president wants the job for the 1/4 million a year paycheck... PLEASE.
    Reply
  •  
    May 20 11:11 AM
    birdman264, Did you read what I said, are you that dumb or what. I, in a nut shell, Said the numbers they give are the good ones they want to put out, they dont tell you about the bad ones, NOT AGAINST THE LAW TO DO. Especially when they get into a fictitious things like being able to count their parking lot subs. Please read what I said in that comment. Was it against the SEC not to give the ARPU when including the parking lot subs? ANSWER = NO, but they didn't give it did they. Something you would have seen if you would have read the comment correctly I gave on this.
    Reply
  •  
    May 20 11:11 AM
    163888...i understand quite a bit...i wasn't suggesting changing any of the economics in any of the automotive deals. but, i was suggesting that shifting money out of the back-end of a deal and to the front would have a tremendous effect on how the investment community views XM's subscriber base.

    that said, not sure how you can make the judgment that one operator's OEM deals are "better" than the other...not even attempting to argue the point. but, without significant insider info from both sides, i'm not sure how you can take such a position without the risk of being waaay off base.

    no, i'm just pointing out that your original comments on XM's OEM business were off the mark...XM hasn't tried to "include" parking lot radios in any of its reporting -- what it has taken some effort to do, though, is provide an accurate apples-to-comparison -- something i think a rational investor appreciates.
    Reply
  •  
    May 20 11:16 AM
    163888...you gotta chill out...no need to be rude.

    there's more than one way to skin a cat here...you wouldn't count the parking lot subs unless you got paid for them...you wouldn't get paid for them unless you restructured the deals...you wouldn't restructure the deals unless you could do so in a way as to make the change in revenue recognition transparent to your current financials.

    so, it's a shell game, but one that has a TREMENDOUS potential impact on your ending subscriber count.
    Reply
  •  
    May 20 11:19 AM
    I can take you seriously when you learn to spell, capitalize and punctuate, it's a sign of intelligence. Dissapointed American has the most words and no mispellings yet he get criticized by people who know less.
    Cut and pasted from YOUR blogs...
    subcribers, dept, acquring, cuurent, vary much, amzingly, subcrription, subcribtion, subcribing, lawers, bankruptsy, btwn, planty, hult, Vary few, decission
    Reply
  •  
    May 20 11:23 AM
    And speaking of which 888, you sound like a "dumb as rep. who can't come to grips" with the fact that your party put this asshole in charge of the FCC. Also it's YOUR party who he has to answer to. Martin also wont be there next year which is why I believe he is taking care of what will take care of him. And lastly, how you could be so appalled that someone ANYONE in office could take a bribe may be the stupidest thing I have EVER read on these blogs! WOW!
    Reply
  •  
    May 20 11:27 AM
    thanksgovt, as to it being the 2 democrats holding this up, yes it is. Why because it is easy, Martin has already said he expacted a decision on this by the end of the year. You have to ask yourself, why would he say that if he, A.) was not ready to vote on it, and B.) at this point, ready to approve it.

    As to the being president, that is realitivly simple, most (that does not include libertarians) want/like power and there is no more powerful job.
    Reply
  •  
    May 20 11:35 AM
    At the risk of sounding like the grassy knoll guy...do you not think that Martin is using those two morons to give him an excuse to delay? They were not there from the beginning. Do you really think that these two are SO omnipowerful that they can really hold this up if he/Bush wanted it done? If so I just want one hit of what you're smoking, because then I wouldn't give a shit.
    Reply
  •  
    May 20 11:36 AM
    By the way. It doesn't sound like that powerful a job if he can't make this happen if he wanted it done.
    Reply
  •  
    May 20 11:45 AM
    It all comes down to pacifying the Georgetown Partners. It's ashame but that's politics. They see an opportunity to steal band width in the name of being a minority owned group. I can see giving up bandwith to non-profit, but this is the log jam and could be the deal killer.
    Reply
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